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For thousands of years, gold has been considered an object of beauty, a currency, a commodity, and an investment. In the past, the alluring metal has motivated entire societies, determined the fate of kings, driven explorers to extraordinary lengths to obtain it, and inspired some of mankind’s greatest achievements. Yet as financial markets developed rapidly in the late 20th century, gold receded into the background, and many investors lost touch with the precious metal.
However, in the past two decades, investor interest in gold has increased significantly, particularly since the 2008 Global Financial Crisis. Investors have realised that, due to its unique attributes and low correlation to other financial assets, gold can potentially provide a number of benefits within an investment portfolio, both from a return perspective, and a risk perspective. Here is a look at some of the key benefits of investing in gold.
Wealth Preservation
One of the fundamental attractions of gold is that it is considered to be an excellent ‘store of value.’ For much of recorded history, the precious metal has been viewed throughout the world as an asset with real inherent value due to the fact that it is physically attractive, durable, easily exchangeable, yet also quite scarce. Today, its legacy as a store of value lives on.
This store of value appeal of gold rose in the aftermath of Global Financial Crisis, on the back of concerns that ‘fiat’ currencies[1] are being devalued as central banks responded to the shock by expanding their balance sheets. Many investors turned to gold in order to hedge themselves against currency devaluation and preserve their purchasing power over time. Whereas central banks can increase fiat currency at will, new gold can only be created from mining activity, meaning that the precious metal cannot be debased or manipulated in the same way that currencies such as the US Dollar, the Euro and the Japanese Yen can be. In recent months several central banks have been expanding their balance sheets and so gold is gaining more attention.
Safe-Haven Status
Gold is also viewed as a ‘safe-haven’ asset, meaning that during periods of economic uncertainty or heightened geopolitical risk, investors have historically turned to the precious metal for protection, pushing its price up. As such, gold can act like a form of portfolio insurance and help provide downside protection during market turmoil.
Portfolio Diversification
Another key attraction of gold from an investment perspective is that the asset has a low correlation to other asset classes such as equities, fixed income and property. As such, it can provide diversification benefits, and potentially improve the risk-return characteristics of investor portfolios.
The advantage of diversification is clear when we look at periods when equity markets are falling. In the chart below we look at what gold did when FTSE 250 stocks were performing poorly. Over the January 1990 to January 2020 window, we look at the worst 36 individual months of performance for the FTSE 250 Equity Index. On average stocks fell 8% in these months. Gold, however on average rose 2%.
Data source: Bloomberg. All assets in GBP unhedged. The FTSE 250 Index is a capitalisation-weighted index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange. Gold is the spot price on Bloomberg. Data from January 1990 to January 2020 using monthly performance. Average performance of both assets in the worst 36 individual months of the FTSE 250. Historical performance is not an indication of future performance and any investments may go down in value.
Inflation Hedge
Finally, gold can also be an effective hedge against inflation, as it has historically performed well during periods of high inflation. When inflation is high and the purchasing power of money is being eroded, investors tend to seek out ‘hard assets’ such as gold for protection, as these kinds of assets are considered to have intrinsic value due to their finite supply. As such, gold prices often rise when inflation is rising.
To learn more about investing in gold, please visit: eu/GoldTo access a list of relevant gold products within the AJ Bell Youinvest platform, please visit: AJ Bell Youinvest - GoldThis material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
[1] Fiat refers to currency that a government has declared to be legal tender, but it is not backed by a physical commodity.
